20 months since MiFID II – what’s changed?

September 03 2019

Phil LloydHead of Market Structure & Regulatory Customer Engagement

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Matt HarveyHead of Fixed Income Execution Platforms & Digital Sales

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Is fixed income voice execution on an unstoppable path to extinction? Or can it just adapt to this new normal with greater efficiency?

It’s been 20 months since MiFID II came into force, and the industry continues to take stock of the impact that the regulation has had on the market.  For example, the increase of electronic venues execution since January 2018 has been unrelenting and has far exceeded expectations – EUR and GBP venue swaps volumes have doubled over this period. Against this backdrop, NatWest Markets (NWM) has embraced the new requirements, and continues to pivot on the opportunities it has created. 

Changes to the business model  

MiFID II changes touched many parts of the business model – from the way we distribute our research to the increased level of transparency required when providing prices. But the impact has been especially profound in the area of pricing and execution services, driving additional technological advances in the workflow space.

In particular, MiFID II’s new transparency requirements and best execution reporting (RTS27) have introduced two key challenges for voice execution:

1) We are required to accurately timestamp inquiries and publicly report quotes in near real-time

2) Clients have more stringent requirements on record keeping and best execution

Scope is restricted to certain flows, but these have drastically transformed the way we deal together. It seems a world away from recording inquiries in a notepad on the desk prior to manual entry into a booking system.  

How has the market reacted since MiFID II day 1?

Volume growth exceeded expectations

Predictably, volume has been gradually shifting to electronic venues as a coping mechanism for newly introduced process inefficiency. Mandatory regulatory drivers were expected to shift around 15% of interest rate swaps (IRS) voice flows onto electronic venues, such as Derivative Trading Obligations (DTO) which mandate trading some benchmark IRS on trading venues.

EUR and GBP IRS volumes on Tradeweb and Bloomberg actually doubled since the introduction of MiFID II in January 2018, vastly exceeding expectations.

G3 IRS Combined Market Delta (Tradeweb & Bloomberg) – GBP on right axis

Why was there such a drastic increase in volume?

Electronic venues have been chiefly used in this context as a mechanism to minimise additional data capture and reporting and maximise Straight-Through-Processing (STP) booking.

Feedback from our clients and observed behaviour reveal the threshold for which clients are willing to suffer voice process inefficiency has approximately doubled. The regulatory constraints have increased the operational costs of each voice transaction. Consequently the pay-off of dealing with a trusted Salesperson, gaining additional market colour and minimising information leakage has now shifted.

These new constraints on the voice business have been coupled with venues extending their product coverage and functionality at pace to drive even more flows to their platforms.

This in turn translated into additional costs for dealers to keep up with changes and additional brokerage on newly regulated execution venues – executing on Multilateral Trading Facilities (MTF) is typically more costly. The full impact of these additional fees is still not fully understood and common sense dictates there will be a commercial impact felt by clients and liquidity providers at some stage.

A big achievement in a short timeframe

Over the last 20 years, several banks have tried to implement the principles of MiFID  II at various stages. However, thanks to the mandated regulation, the industry has now successfully achieved transparency of voice inquiries, especially when not executed – in what has been a relatively short time period.

Tech is key

NatWest Markets and other banks have landed new tech on the Sales desktop to help with the digitisation of these voice flows in an effort to achieve regulatory compliance. This tech has also provided the ability to analyse flow in a similar way to what is possible via electronic venues –benefitting the dealer and client when reviewing service levels.

A number of fintech initiatives have also launched to capitalise on these new workflows, aiming to introduce shared request for quote (RFQ) platforms with minimal dual entry. Many of those platforms ultimately end up looking very much like execution venues and introduce additional expense for dealers.

Some industry projects have nevertheless emerged that seem to genuinely reduce the need for proprietary build and benefit both dealers and clients. They build workflow that deliver increased controls, workflow efficiency and minimise the impact of post MiFID II additional process. Symphony, OpenFin, Finsemble, FDC3 and ipushpull, to name a few, can be leveraged to help clients and dealers with regulatory controls without compromising on service or efficiency.

An opportunity has materialised: combining the benefits of dealing directly with a Salesperson with the speed, efficiency and regulatory controls provided by electronic flows.

A third execution channel in the making

Voice and multi-dealer platforms  

To reflect the vast number of execution strategies, market participants should have a choice in how they do business. In Rates and Credit, this choice is restricted by the lack of viability of single dealer platforms – clients are generally opposed to running different proprietary applications for each of their dealers on their desktop.

This leaves us with two channels: voice and multi-dealer platforms. As explored, the voice channel is now associated with higher transaction costs. And we’ve observed an accelerated shift to multi-dealer platforms as a coping mechanism, even when some prefer to transact via voice for the reasons mentioned above.

Then came ‘Digital Voice’ – the third channel

 We’re working on providing a third channel – a hybrid mix of voice and multi-dealer platforms, isolating the benefits of both. Our aim is to preserve the high-touch sales-client servicing model provided by voice whilst removing process inefficiencies that have been exacerbated with the introduction of MiFID II.

In essence we will enable clients and sales to leverage our electronic trading infrastructure to:

  • Allow the streaming of prices into chats
  • Publish our of axes into chats on-demand
  • Execute and automatically book trades directly from the chat
  • Seamlessly capture and report timestamps

We've labelled this new high-touch electronic channel as ‘Digital Voice’. NatWest Markets has recently launched a key capability within this emerging channel – the Scout voice RFQ bot within Symphony, and it is now being trialled with clients.

Scout is presently live for cash rates and credit bonds, with IR Derivatives planned by end of year. Watch out for more information at the Symphony Innovate and Fixed Income Leaders events in October.

Our daily dialogue with clients has identified many shared workflow opportunities centring on pricing and execution, axe delivery and additional services to support best execution and other control evidence.

The future is ‘E’: Electronification

The move towards electronification seems relentless and inevitable. Despite current pauses due to both Brexit and European elections, the extension of regulation towards this objective is almost certain.

The extent to which human interaction can be preserved whilst leveraging automation continues to be a key consideration for developing customer propositions. Clients and liquidity providers who adapt will be able to control migration to electronic channels, rather than just act as passengers.

Market infrastructure & regulation

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